Charting a path through Europe's sustainability landscape

Needle and tangled thread
Our in-depth interviews and survey revealed sustainability rules as one of the key challenges facing businesses in Europe. In recent years the E.U. has been a trailblazer for sustainability-related regulation, dedicating extensive legislative time to measures designed to support the transition to Net Zero, improve transparency and encourage greater levels of investment in sustainable activities.

We talk about Net Zero at every board meeting. We have strategy sessions all dedicated to renewable energy, the Green Deal, carbon footprint, everything. It's amazing how much time we spend on it.

The possibility of businesses gaming the system and “greenwashing” their operations saw the E.U. introduce its taxonomy to classify economic activities that are deemed sustainable. This work has proved controversial however, prompting as it did intense debate over the inclusion of energy sources such as gas and nuclear on the approved list.

Among our interviewees, Net Zero transition plans – which feature in several regulatory frameworks, including the Corporate Sustainable Reporting Directive, and are designed to ensure businesses are aligned to the goals of the Paris Agreement – were seen by many as the next big challenge they face. 

Transition plans represent next big challenge for business

Jurei Yada, Progam Leader for sustainable finance at climate change think tank E3G, said: “Until now, the E.U. has been focused on defining ‘green’, but these activities represent just 10% of the economy. The focus is now shifting to transition planning and creating a regulatory framework to guide businesses and investors through the path to Net Zero. Exactly how this debate will play out is likely to become clearer in the next E.U. mandate, when the technical implementation of transition planning is expected to take shape, including where this meets prudential regulation.”

I have conversations with partners based in the US about CSDDD, and they have questions about the extraterritorial application of the directive. There is a divide in opinion between those that ask if it’s in the interest of American businesses, while others see it as a good thing.

Our survey revealed that global businesses recognize the strategic importance of sustainability and Net Zero – and are diverting significant investment into planning and implementing sustainability initiatives – but remain unconvinced as to the efficacy of their efforts.

According to our survey, 45% of businesses were investing time, resources and budget in environmental sustainability – including climate disclosures and initiatives to reduce emissions. Just over half (53%) of our respondents were confident that they would achieve their strategic aims, with only 29% saying they were very confident.

The European Corporate Sustainability Reporting Directive introduces very significant burdens on European companies that have subsidiaries in places which don’t necessarily have the same level of reporting maturity. The challenge is that many of the categorisations used in Europe won’t map out neatly on to other markets, particularly from an audit perspective. Reporting on that data with a high level of assurance by 2025 is a very significant project that is going to cost us real money.

Lack of preparation among businesses for forthcoming regulations

Overall, fewer than one in four (24%) of the leaders we questioned said their businesses were well prepared to meet the expected requirements of the CSDDD, possibly because of the difficulty in seeing through their supply chains to get an accurate picture of what’s going on, and, more fundamentally, mitigating any negative impacts. 

Our survey also revealed that fewer than one in five (14%) respondents felt well prepared to deliver environmental reporting between global regions that differ in their approach (e.g. the U.S. and the E.U.). 

In recent years there has been a backlash against ESG investing among Republican states including Kentucky, Texas, Florida and Kansas. Several state attorneys general have launched investigations into whether actions by groups of banks to deny some companies access to services based on their environmental records amount to anticompetitive co-ordination and violate consumer protection laws. There has also been legislation forcing state-sponsored pension funds to divest from entities deemed to be promoting ESG goals, and bills passed requiring government investors to base their decisions only on “pecuniary factors”, often defined to exclude ESG analysis.

Against this backdrop, many global organizations feel under pressure to disclose less about their ESG activities at the same time as European regulations have been requiring ever more specific sustainability information (the Financial Times has highlighted a study of U.S. asset managers in which 30 per cent said they were going to be more circumspect about their ESG-related activities in future public documents). Any asymmetry is a potential source of litigation, with plaintiffs pursuing businesses where they see inconsistencies in reporting.

The increase in sustainability data due to be published under the CSRD – and national duty of vigilance laws – is set to make Europe a more active destination for sustainability-related litigation in future.

The latest research from the Sabin Center for Climate Change Law reveals a steady uptick in climate claims against businesses in Europe, with hotspots in France, Germany and the Netherlands. The Dutch courts in particular have heard a number of high-profile cases, including in 2021 when a judge ordered Shell to slash its carbon emissions by 45% relative to their 2019 levels within a decade (the decision is currently pending an appeal).

The ruling is important because it applies not only to the company’s own emissions but also those created by the use of Shell’s products, and was the first time a court had ordered a business to reduce its carbon output in line with Paris Agreement. With the CSRD requiring large organizations to publish transition plans expressly aligned with the Paris goals, more such cases could arise in the future.

We want to work with our supply chains on carbon emissions, but we don’t always get the full visibility all the way through the chain that we’d like in certain parts of the world. It’s a struggle to get comfortable with that.

Trends in European climate litigation

The Sabin Centre’s latest research flags four key themes in EU climate cases.

  1. A surge in greenwashing cases with high-profile claims against extractives companies for continuing with fossil fuel investments despite Net Zero commitments, challenges to claims of products being “climate-neutral”, suits brought over alleged inconsistencies between climate pledges and corporate lobbying, and allegations of failure to disclose climate risks by banks. This is especially so given the adoption in early 2024 of a directive empowering consumers to act against corporate greenwashing (which bans the use of general environmental claims like “environmentally friendly”, “natural”, “biodegradable”, “climate neutral” or “eco” without proof) and the Green Claims Directive, which sets tighter rules for carbon offsets claims and allows companies only to mention offsetting schemes if they have already reduced their emissions substantially and use those schemes for residual emissions only.
  2. Challenges to the inclusion of natural gas in EU taxonomy. An uptick in cases challenging the EU’s environmental classification structures which includes a complaint filed by a group of European NGOs challenging the inclusion of natural gas as a low-carbon transition fuel under the EU taxonomy.
  3. Full cycle of fossil fuels. Plaintiffs have launched lawsuits arguing that climate change impacts were insufficiently considered in the environmental impact assessment process, with a focus on alleged failures to assess emissions produced when fossil fuels are used (Scope 3), rather than those associated with production (Scope 1 and 2). High-emitting activities are now more likely to be challenged at different points in their lifecycle, from initial financing to final project approvals.
  4. ‘Turn off the taps’ cases. Alongside ongoing challenges to project approvals, there are also cases focused on fossil fuel supply. One, filed in February 2023 against a leading bank in France, alleged that it has failed to comply with its obligations under France’s duty of vigilance law.

Claims are also being brought in Europe under consumer protection and advertising laws, as well as the E.U.’s Unfair Commercial Practices Directive. Here, lawsuits are testing whether consumers fully understand concepts such as “climate neutrality” or “Net Zero”, which often involve the reduction or offsetting of emissions rather than their eradication. We are also seeing claimants pushing companies to disclose the negative impacts of their operations, instead of simply focusing on the positives.

Europe is a now a higher-risk jurisdiction for climate-related litigation.

Net Zero disclosures are increasingly a trigger for greenwashing claims, with energy majors and mining companies targeted over whether their environmental commitments are misleading given their current fossil fuel investments. The EU legislature also introduced the Green Claims Directive to address false environmental claims relating to the environmental aspects of a product or a business itself. Under these rules, companies can only mention offsetting schemes if they have already cut their emissions substantially and only use the schemes for residual emissions. Any carbon credits generated by offsetting schemes will also have to be certified under the EU’s Carbon Removals Certification Framework, which is currently being negotiated. (You can read more about decarbonisation disputes in Europe here.)

Our survey revealed a global business community that is not only underprepared to track and disclose its environmental impact across the world, but also one lacking confidence in the systems it has in place to manage the risks associated with ESG activism and the uptick in sustainability-related class actions.

While 70% of global businesses reported that they had systems in place to mitigate the risk of ESG activism and climate-related mass claims, fewer than three in five (57%) of our respondents were confident these systems mitigated those risks effectively – with only 27% very confident.

Some analysts have predicted that a Parliament with more far-right representation could see the EU’s sustainability rules loosened over the next five-year term. If this in turn causes businesses to backslide on their own low carbon ambitions, it could see an even more hostile litigation landscape as NGOs and civil society groups attempt to redress the balance.

Others have proposed a less-pessimistic outlook, whereby politicians remain convinced of the energy security benefits of increasing renewable investment and reframe Net Zero in the context of job creation. And as our survey shows, many businesses remain committed to Net Zero and recognise the opportunities it brings.

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